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May recap of activity in CME Case Shiller futures posted. See option offerings!

I posted a recap of activity in the CME S&P Case Shiller home price index futures and options for May. The recap is in the Reports section or one can link here.

The key themes in recap include:

–There were 12 futures contracts traded in April across 6 regions and 4 expirations on 4 dates.

–OI fell to 48 as 21 May contracts expired. OI remains front-loaded (1.46 years, average-to-expiration) and is concentrated in the November expiration cycle (83%).

–Bids were up strongly for the second month in a row across most regions. Gains are primarily in the shorter expiration contracts with implied HPA gains tapering off dramatically after Nov ’18.

–Bid/ask spreads (on contracts that had two-sided markets in both April and May month-end) widened slightly.

–There are two-sided bids in all contracts out to Nov ’18, but then primarily just bids (as changes in those levels drive closing prices).

–No options trades.

–I’ve introduced suggested put offerings across a wide range of regions and expirations in the separate regional contract pages. Think of as a template to prompt discussion. I’m open to quoting other strikes, or calls, in response to specific inquiries.

Net, the CME prices (and this market maker) have been chasing the ever-increasing optimism on the outlook for home prices gains in 2017. Of interest to me, is the strength in implied home price gains over the next 12 months, versus the lack of enthusiasm (so stronger bids) in longer-dated expirations. While slower implied HPA might be function of low inventory being resolved over the next few years (either due to construction, institutional buy-to-rent programs being open to selling, a fear of higher interest rates, or underwater owners getting their head above water as prices rise), my sense is that the lower forward HPA primarily reflects an imbalance between forward buyers and sellers. That is, for every inquiry I get looking to buy X20 contracts, I get 10 asking about selling.

Beyond that observation, a key takeaway from the recap is my rolling out suggested offering levels on almost 200 puts (11 regions * 6 expirations * 3 strikes). My focus has been on slightly out-of-the money puts. I’d love to build a book of inquiries on such combinations, but am open to other expirations, strikes and calls.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss any aspect of this report.

Thanks,

John

How to trade on possible impact of Trump election on home prices

Much has been written elsewhere on the possible impact of a Trump Presidency on home prices. There are macro issues (e.g. mortgage rates and the fate of the GSEs) as well as possible relative value regional issues (e.g. who will benefit from increased spending on infrastructure vs. who will be taxed to pay for it). I leave all of those very timely, important discussions for others to host.

The angle I’d like to address here, is “how does one express a view (financially) if they feel a certain way on either category of issues?”

This is where CME Case Shiller home price futures may play a role in two different dimensions.

First, outright market levels, across the CUS 10-city index and each of the ten regional components, allows one to express an opinion on the absolute level of any particular index. I’ve picked the Nov ’18 (X18) expiration series as: a) two years should be enough time for any changes to play out, b) it’s the longest contract (by expiration) that has regularly had two-sided markets, c) comparing Nov ’18 to today avoids much of any seasonality (but not all) and d) more germane to the second point I’ll make, there are intercity quotes for all regional pairs with the CUS 10-city index.

The chart below takes the CME quotes and converts bids, asks, and mid-market levels into percentages versus the spot index. The “cold” areas (e.g. the Northeast, Chicago and Denver) are to the left, the HCI (CUS 10-city index) is in the center, and the rest are to the right.

Note that all 11 contracts are priced at levels that are about 3-9% above spot levels. Implied HPA has slowed but has not turned negative. DEN and LAV are priced for the highest gains, while NYM, WDC and CHI look weaker.

One can trade any of these contracts on an outright basis, particularly if they have a view on home index changes over the two years that are different than this chart reflects.

However, and this is my second point, there may be traders who are not comfortable with an outright view but they have certain strong ideas about future levels of one region versus another. For example, some might argue that President Trump might be positive for LAV (home to construction workers), DEN (extraction industries) and MIA (where he’ll likely spend time) and less so to WDC (smaller government) and California.

The middle bar in the candle bars below express (a version of) the differences in the above chart – shown as CUS gains minus regional gains – hence DEN is shown as negative as CUS gains are lower DEN.

The top and bottom value to the candles are the implied gains from quotes on intercity spread contracts. That is, one can enter into a trade where one can simultaneously buy (or sell) the HCIX18 (10-city index) contract while selling (or buying) a regional contract, at an agreed upon spread.

While those spreads are quoted in terms of points, one can convert those point differences into implied percentage differences. (See my Sept 28th blog for a more detailed explanation of IC spreads.)

With IC spreads one can express a view about relative price moves with much less outright risk. Note though, that as with outright trades where it’s not enough to think that home prices will be higher two years from now, as that’s already priced into the X18 quotes. The same theme applies here. That is, it’s not enough to think that MIA, LAV and DEN will outperform (or NYM, WDC, or CHI will under-perform) as that is already priced into IC spreads.

What a trader/hedger must determine -both on outright and IC trades – is whether the level implied by current quotes is above/below their expectations.

A note, I’ve only posted quotes on CUS vs. regional pairs but any regional vs. regional pair can also be traded electronically. Let me know if you have any interest in such.

Furthermore, in addition to outright and IC spreads, please know that one can also trade calendar spreads (e.g. Nov ’18 vs. Nov ’16, or Nov ’20) for any contract.

Finally, options (both puts and calls) can be quoted on CUS, NYM, CHI and LAX. I’ve had a number of inquires from traders looking for options on the other regions. The CME seems to be working to make this happen.

Net, there’s a variety of tools for traders to express views on how a Trump Presidency (or any other factor) might impact home prices both to outright levels, and on relative value.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss this piece or any trading axes.

Recap posted of CME activity during September

I’ve posted the monthly recap of activity in the CME Case Shiller home price futures contracts for the month of September. You can find the recap in the Reports tab or you can link here.

The recap has multiple graphs and tables of quotes across the ten regions and 11 expirations.

The summary observations include:

–Activity remained quiet with only 11 trades in September. Per usual, the majority (8) took place the days before/after CS #’s were released. All trades were in three expirations (X16, G17, X17) across six regions.

–There seemed to be both outright, calendar spread and inter-city spread orders executed.

–Open Interest rose to 42 from 37 for futures and remained unchanged at 18 for options. Futures OI remains concentrated in the Nov expiration cycle with all but 2 contracts. OI is also very front-loaded with ~2/3rds in Nov ‘16 expiration.

–Offers were generally lower on the month across regions except DEN, MIA and SDG. Bids were mixed w/ NYM and SFR off the most.

–Bid/ask spreads were (in aggregate) tighter across all expirations

–I posted a full set of bids/offers for Nov ‘19 and ‘20 on Sept 30 but mostly there were two-sided quotes out to Nov ’18 (except May 18)

–Volatility (vs. S&P 500 and outright) remains VERY low (Slide 15)

–There are tight Intercity spreads across all X18 CUS/regional pairs.

–Shorter-dated put quotes, and longer-dated call quotes have been posted for selected contracts

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trading axes.

What Homeowners (and markets) are thinking

Pulsenomics recently published their semi-annual survey of homeowners. (You can order a complementary copy here ). The 18-page report is chock-full of surveys (using great graphics) on what people think about home ownership, willingness to buy, and (importantly for traders here) outlook on prices. The survey participants are divided into homeowners vs. renters, AARP members vs. Millennials, and many other ways. In short, I’d argue that anyone looking to trade CME Case Shiller home price index futures should allocate a good block of time to work through the findings.

The only thing that’s missing is an action plan should you agree/disagree with any of the home price forecasts for the next year. Fortunately CME calendar spreads may be the best publicly quoted market where you can express a different view.

Now, let me first caveat that the Pulsenomics survey references Zillow indices, while the CME settles on values from Case Shiller indices. Second, there may be many reasons why survey results might differ from market-implied HPA. That said, the CME contracts may be the best way to express an opinion on HPA for 2016.

The table above shows recent market quotes for the Feb ’17 and ’18 contracts. This is relevant to a discussion of 2016 HPA as both Feb contracts settle on the value of the Case Shiller index for the period ending in December. Thus, one can compare outright markets, or mid-market vs. mid-market prices to get a sense of percentage differences between the two contracts (that reference Dec ’16 and Dec ’17 values). (A caution -indices can be revised after the initial publication).

First, note that the mid-market of Feb ’18 contracts is higher for all 11 regions than for the Feb ’17 contract. Differences (expressed in percentage terms) range from +2.4% for WDC to +4.3% for DEN. Note also (in a point made in the Pulsenomics report) that the percentage gains are generally much lower than the most recent 12-month change (with the exception of NYM and WDC which are coming off under-performance vs. peers).

However, rather than looking at mid- to mid-market prices, a market (the calendar spread market) also exists where instead of selling (or buying) futures in one expiration while trying to simultaneously buy (or sell) contracts for a different expiration, one can enter into trades to execute the two sides in one trade, at a defined spread. Those price differences can be converted into percentage differences (and are shown in the columns to the right).

So, just as with outright futures, one can observe and/or enter a trade not to express a view that home price index levels will be higher in 2018 vs. 2017, but by how much. One can also trade one calendar spread versus another, but again the DEN contract already has priced in the highest gains (i.e. 3.8% on the bid side) so one would have to consider (in this instance) how much DEN will outperform another region.

I’ve posted 1×1 markets (one lot bid vs. one lot offered) to prompt discussion. I’d be open to facilitating larger-sized trades, and/or to providing quotes at levels inside those shown to further stimulate this conversation.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trading axes.

May release of CS #’s

Yesterday’s Case Shiller #’s were both 1) outside bid/ask ranges on the expiring May16 contracts and 2) a reminder that there may be trading opportunities right up to the last days of trading.

The table above shows that 9 (!!!) of the Case Shiller indices were above the offered side of the expiring May contract. Since the May contracts settle on these indices, one could have bought any of the nine contracts the last day of trading, and made money on the settlement.

I’ve been monitoring settlements on expiring contracts for 5+ years and this is by far the biggest set of outlier results that I’ve seen. (As an aside, there have been two expirations where all within bid/ask spreads. Most of the time the outliers are random – e.g. half above/ half below). This was a shock (to me, but not traders who bought in the last week -hat’s off to you!).

What makes these results even more noteworthy is that the bid/ask spreads on the expiring May16 contracts were much wider than normal. Typically I try to drive bid/ask spreads to 1.0 by expiration. However, here SDG and SFR were much wider and the index results were still above offered side levels.

Prices of longer-dated contracts rose, and bid/ask spreads widened (dramatically) after then numbers on Tuesday. Net though, prices for the month moved up only slightly and bid/ask spreads were not “too” much wider.

I’m going to head back to the drawing board on how to approach expiring contract valuations. I’m open to advice from anyone.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any ideas on index calculations or trading ideas.

Post Feb #’s -Market Color

The CME home price futures were relatively quiet after this morning’s release of the December Case Shiller #’s.

The first table below shows a comparison between the Feb CME markets from yesterday and today’s #’s. Note that there were four regions (CHI, LAV, LAX and SDG) where the index results were higher than the offered side the day before, and three regions (MIA, SFR and WDC) where the index results were lower. (I’ll refer later to these as “surprises”.) However these outliers tended to offset each other as the 10-city index value printed today was within 0.1 of the mid-market value for the HCI (10-city) Feb ’16 contract. With seven outliers profitable opportunities seem to still abound for those claiming to be able to predict Case Shiller values (even just one day forward). I would note that making that exercise slightly more difficult, and contributing to WDC’s role as an outlier was a >1.0 point revision (lower) to last month’s WDC index. I’ve noted before how of all the regions, WDC seems to be the one subject to the largest revisions. Anyone got a clue what makes the WDC data gathering process different?

Market reaction to longer expirations was muted. The line below “One day price move” shows the change in the mid-market values between yesterday and noon today. Regions that were negative “surprises” tended to be quoted slightly lower (e.g. MIA, SFR, and WDC) while regions that were upward “surprises” tended to be quoted slightly higher (e.g. CHI, LAV, and SDG). The benchmark HCIX16 contract was -0.2 lower (the minimum price move).

Market activity has been extremely quiet with no other traders taking a lead in pricing of any contracts. There have been no trades.

Finally, with the expiration of the Feb ’16 contract, the CME opened trading in the Aug’17 contract. I’ve posted prices for the CUS (10-city index) contract, but will probably lay low on this contract for the near future until there is third-party interest.

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions.

Basics _Bid Ask spreads for Case Shiller futures contracts

My last blog talked about which contract expirations get most of the (limited) trading. This one shows (see table below) where the tightest bid/ask spreads are (today). That’s important as the markets with the narrowest bid/ask spreads tend to be the ones with the greatest likelihood of a trade. After all, if a buyer and seller are 4 points apart the difference may be too much to surmount, or there may not be market events that would cause a buyer or seller to change their price so much very quickly. However, a market with a bid/ask spread of 0.20 points (the minimum price move) might result in trade should either side (assuming that the bidder is not the person offering) should either party changes their mind even slightly.

The table also shows that there are two-sided markets in all contracts out to Nov 2017, but after that only in a few contracts (ones that I think other traders might have an interest). (Note that a new Aug 2017 contract will appear when the Feb 2016 contract expires.)

The two tightest bid/ask spreads (by expiration) are highlighted in green, while the two widest are highlighted in red. I try to keep the CUS (10-city index) as always one of the tightest bid/ask contracts as CUS contracts are of national interest and they can be used as one side of Intercity (IC spreads). Bid/ask spreads are shown in points, so lower-priced contracts (e.g. CHI) might show up as one of the tightest contracts, but not necessarily on a percentage basis. Conversely, any higher priced contracts that show up on the tightest list, will be even more relatively tight on a percentage basis.

Bid/ask spreads tend to widen the longer the time to expiration, but not uniformly. As I’ve noted in other blogs the November expiration contracts are outstanding the longest, are the only contracts for hedging 3+ years, and thus tend to have the most open interest and tightest markets.

Some contracts might have wider bid/ask due to volatility (e.g. SFR) but some are wider just because they don’t seem to get much interest (e.g. DEN, and LAV).

I’d appreciate any help in narrowing any of these spreads with bids and/or offers or feel free to “adopt” one contract (or region) and make the markets yours.

Feel to contact me (johnhdolan@homepricefutures.com) if you like to chat about this table.

Stocks vs. Home Prices -moved back to “normal”

I’ve been trying to get traders to react to volatility in the stock market by getting them to challenge whether such price moves change their expectation of forward home prices. While past blogs have suggested that the correlation has been weak, price moves (albeit mostly mine) since year-end, have shown much more of a correlation. The question to readers is – is this correct, or should home price futures trade (in theory) in their own world, OR be even more impacted by the level of the stock market.

The graph below shows a scatter diagram of the S&P500 index versus closes on the CUSX16 (10-city contract for Nov ’16) for three separate periods: Sept 1 -Nov 30 (blue diamonds), Dec 1-30 (brown squares) and since year-end (green triangles). Trend lines for each of the three periods are overlay-ed on the scatter diagram.

Clearly the slopes of the scatter diagrams have turned from a weak negative correlation (?) to positively sloped. The most recent scatter diagram also appears tighter. While this might be of more relevance had there been numerous bids and offers, many are mine, so what this reflects has been more of my personal pricing strategy. I write this here to challenge other traders into commenting that the slope should be flatter or steeper, or that the correlation should be higher or lower.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss, or propose a trade to take advantage of a different approach.

Basics -Distribution of Trades (by Expiration)

In preparing to write an upcoming blog on “trading in expiring contracts” I first wanted to check to see whether my intuition that trading volume was concentrated in the front contract, was borne out by the numbers. While there is probably a more comprehensive database at the CME of all trades, I decided to first check with my own trades. Since I’ve been market maker for 5+ years and have been involved in the majority of trades, it seemed likely that my trades might resemble the universe, but I’ll concede that I may have trading biases (e.g. stick to/avoid/ front contract that may skew the results slightly).

I took my database of 800+ trades (by lot count) and tried to eliminate any trades involving one leg of a calendar spread where there was a buy and sell at the same price, on the same day. (That is the calendar spread combined with an outright trade may have facilitated an outright trade, but the simultaneous buy and sell of the same contract on the same day at the same price did not by itself indicate interest in trading a contract with that expiration. My intent was to only capture the outright trade).

The following table shows the distribution of 600+ trades grouped into months to expiration buckets.

While more than 60% of the trades (line -right axis) were on contracts within 12 months of expiration, trades within one month of expiration were <10% (blue bar-left axis). However, there does appear to be some front-loading to the trading in that ~40% of my trades were on contracts with <4 months to go (so typically the front contract) and ~85% of my trades were on contracts that expired within two years. Tighter bid/ask spreads in shorter expiration contracts (due to less uncertainty?) may have facilitated greater trading in shorter expirations.

To build volume in longer-dated (>2 years) contracts it seems that more effort needs to be focused on calendar spreads and inter-city spreads. I’ve tried to encourage such trading with X16/X16 calendar spreads and Intercity spreads across the X17 contracts, but those are all within two years of expiration.

That said, I’m heartened to see some outright interest in the HCIX18 contract. I’d encourage others (and will help) to use recent tightness in the HCIX18 bid/ask spread to contribute X16/X18 and X17/X18 calendar spread quotes, as well as X18 IC spread orders.

If you have any questions, please feel free to contact me (johnhdolan@homepricefutures.com) to discuss any such ideas.

CME Case Shiller future post today’s #’s

CME prices were mixed following this morning’s release of the Nov ’15 Case Shiller indices. The table below shows prices (as of earlier this morning) on the Nov ’16 contracts for all ten regions (plus the HCI/CUS 10-city index). Note that prices are modestly lower for BOS and LAV, but higher for MIA and SFR.

Bid/ask spreads are slightly wider, but I hope to tighten them up by the end of the day (or by month-end).

While there were a number of trades yesterday (with SDG getting most of the attention) there have been no trades today (as of this writing).

Keeping with my focus on options, I’d note that HCIX17 200puts are quoted 4.0/5.5 5×5. (I’d love to get something started in options).

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or have a trading axe that you’d like me to share with this community.